During the COVID-19 pandemic, the Reserve Bank of Australia embarked on an unprecedented experiment: quantitative easing, or QE. For most Australians, the mechanics of QE remain mysterious. This piece demystifies it.

What Is Quantitative Easing?

QE is a monetary policy tool used when interest rates are already near zero and the central bank needs to provide additional stimulus. The RBA purchased Australian government bonds from financial institutions, crediting those institutions with newly created money. This pushed bond yields lower, making borrowing cheaper across the economy, and injected liquidity into the financial system. At its peak, the RBA's bond purchase program totalled approximately $350 billion.

The Term Funding Facility

Alongside bond purchases, the RBA launched the Term Funding Facility (TFF), which provided banks with cheap three-year funding at 0.10 per cent. This was designed to ensure credit continued to flow to businesses during the uncertainty of the pandemic. Banks borrowed approximately $188 billion through the facility — funding they then lent on at rates that seemed extraordinarily low by historical standards.

The Inflation Legacy

The stimulus worked in the sense that Australia avoided the worst economic outcomes feared at the pandemic's start. But the combination of ultra-low rates, government fiscal support, and global supply chain disruptions ignited the inflation that followed. Unwinding that inflation has required the sharpest rate-hiking cycle in a generation — a reminder that monetary policy is a blunt instrument with long and variable lags.